Inside the fraught race to manage China’s money

For Western wealth managers eager to feast on the China market, Wan Long qualifies as prime red meat. Known as China’s “No. 1 butcher,” Wan is the billionaire chairman and chief executive of WH Group, the world’s largest pig slaughterer and pork processor. And nearing 80, Wan is surely weighing how to preserve his vast wealth for family and favorite causes.

But a web of regulations in Chinese financial services keeps potential clients like Wan largely, tantalizingly, out of reach of foreign wealth managers. The rules make it almost impossible to deal directly with customers on China’s mainland, forcing foreign firms to lure smaller amounts of Chinese money offshore instead. And even if protectionist obstacles fell away, Western wealth managers would need to sink vast resources into competing against the big Chinese financial firms on their own turf.

Sergio Ermotti is willing to make that bet.

“We are focused on the longer trend,” says Ermotti, chief executive officer of Swiss banking giant UBS Group, the largest wealth manager in Asia and the world, in an interview with Institutional Investor.

Ermotti concedes that UBS won’t make any significant profits from onshore Chinese business over the next three to five years. And that’s bad news for other foreign wealth managers who lag well behind UBS. It is increasingly clear to them just how difficult it will be to gain onshore stakes in the world’s second-largest wealth management market.

Nowhere is private wealth being generated faster than in China. That’s especially true for ultra-high-net-worth (UHNW) individuals, who are the most coveted clientele. As financial advisers never tire of pointing out, China mints two new billionaires every week.

Chinese wealth management is also alluring because it offers lucrative fees in a world where charges across the whole range of financial services are contracting. Elsewhere, wealth and asset managers complain their gross margins are under pressure. Mutual-fund, index-fund, and trading fees are miniscule, and passive investing is widespread. Traditional investment advisers in the U.S. and Europe are starting to trim their prices, and Wall Street firms are launching ever-cheaper robo advisers.

But entry into the China market — on- or offshore — takes deep pockets. Only large Western financial players have the combination of investment banking and wealth management prowess to service Chinese and other Asian UHNW clients. Besides UBS, the A-list includes its Swiss rival Credit Suisse Group, now the second-leading wealth manager in Asia. A few U.S. banks qualify: Citigroup, JPMorgan Chase, and Morgan Stanley. Goldman Sachs Group, a rising force in Asian wealth management, may be slowed by criminal charges and possibly huge fines linked to its involvement in the multibillion-dollar Malaysia Development Berhad (1MDB) scandal in Malaysia. Goldman did not respond to multiple requests for comment.